The Politics of Financial Crises: Lessons Across Continents

The Latin America International Affairs Programme of LSE IDEAS played a leading role in the organisation of the conference 'The Politics of Financial Crises: Lessons Across Continents', which took place on Thursday November 29th, 2012 at Arundel House in London, UK.

The Keynote Speech was delivered by Maarten Verwey, Deputy Director-General for Economic and Financial Affairs of the European Commission. In a highly informative speech, Mr. Verwey argued that the European political system has delivered a response to the crisis that is broadly in the right direction but that it has not been particularly efficient (too slow, too little, too late). Mr. Verwey noted that the less than economically optimal response to the crisis does not mean that European leaders are irrational, but that they make rational choices with a pre-crisis institutional framework. He concluded that it is a small miracle that so much has been achieved already to address the problems caused by the crisis but that a comprehensive solution will require a historical transformation of the Euro Area.

The Keynote Speech was followed by three panels that discussed the comparative impact of financial crises on domestic politics, on state-society relations and the role of international organisations in dealing with financial crises.

In the Domestic Politics Panel, presenters analysed national responses to financial crises in Italy, Spain, the US, Russia, Greece, Mexico and Venezuela. Dr. Jonathan Hopkin from the LSE argued that while there are major differences between Northern Europe 'the non-trouble countries' and Southern Europe 'the trouble countries', there are also huge differences within them that affect and shape the different forms crises can take. He focused on Spain and Italy and noted that while the former's problem is mainly a banking and deficit problem, the latter faces primarily a debt problem. Looking at the ways in which crisis reconfigure political landscapes, Professor Edward Ashbee from the Copenhagen Business School, compared policy responses between the US and Europe. Professor Ashbee noted that while it is often argued that the US has a small welfare state, an argument can also be made to illustrate its large size: the US welfare state is given through huge tax credits and tax concessions, rather than through direct expenditure programmes. Professor George Philip from the LSE Department of Government, analysed Mexico and Venezuela from a comparative perspective and argued that voting behavior has changed decisively in both countries as an outcome of financial crises. Professor Philip also noted the importance of unpredictable 'human factors' and how many forecasts continue to be proven wrong. Dr. David Woodruff's presentation focused on the political aftermath of the 1998 crisis in Russia--driven by an institutionally unsustainable commitment to a fixed-exchange rate regime. According to Dr. Woodruff, this institutionally unsustainable policy made the Russian state seem much weaker than it actually was.

The State-Society Relations Panel began with a presentation by Professor Andrew Gamble from the University of Cambridge, who noted that the current crisis has evolved from a financial crisis to a fiscal crisis and, in its current form, to a sovereign debt crisis. He argued that the fiscal crises that often follow financial crises are actually a means by which the state is slimmed down again and made proportionate to the private sector. As a result, crises play an important role in the overall capitalist cycle in restoring the controls that are necessary for the capitalist economy to survive. Professor Mary Kaldor, Director of the Civil Society and Human Security Research Unit at the LSE, examined the role of social movements and protests that have received much mass-media attention. She noted that protests throughout Europe should not only be understood as reactions to austerity measures, but also as responses to citizens feeling unrepresented and blocked at a national level. The final contribution by Dr. Sotirios Zartaloudis, Lecturer at the University of Manchester, concentrated on the dramatic effects the financial crises had on Greece. Dr. Zartaloudis argued that Greece's current delicate situation may be partly attributed to the policies of Andreas Papandreou during his tenures in the 1980s, when the incumbent administration pursued clientelistic policies, 'institutionalised' tax evasion, and substantially expanded the public sector, which eventually resulted in large deficits. Dr. Zartaloudis also emphasised the utmost importance of European support in order to ensure not only the survival of the economy, but also of democracy in Greece.

In the International Organisations Panel, Christian Daude, Head of the Americas Desk of the OECD Development Centre, argued that how countries deal with crises has mainly to do with domestic politics and that there is still a dearth of research on the impact of financial crises on political systems and on the impact of political systems on financial crises. Looking at social aspects of financial crises, Jose Fernandez-Albertos from the Spanish National Research Council, noted that austerity has an asymmetric impact on different social sectors and argued that distributional conflicts cannot be solved by rules-based mechanisms or by delegating policy making to experts. Drawing lessons from past crises in Latin America, Stephany Griffith-Jones, Financial Markets Program Director of the Initiative for Policy Dialogue of Columbia University, claimed that financial liberalisation without proper regulation leads to financial crises and that drastic austerity measures deepen recession. She argued that if Europe wants to a avoid a lost decade for economic growth similar to that of Latin America in the 1980s, it must implement pan-European stimulus measures.

The Conference was closed by a Roundtable chaired by Professor Michael Cox, Founding Director of LSE IDEAS. Mr. Andrew Dean, Director of the OECD Country Studies Branch shed light on how the crisis has affected advanced and emerging market economies differently. Mr. Dean emphasised that any further deterioration in the Eurozone will have serious consequences on a global scale. As a result, both the core of the problem and the solution lie in Europe and more intense and concerted measures by the EU would help to overcome the tight grip of the current crisis. Mr. Laurence Whitehead, Senior Research Fellow at Oxford University, put forward two related but analytically distinct questions: first, that it is important to asses what the role of politics is and how it affects responses to the financial crises; and second, that we should reflect on how the financial crisis has affected and continues to affect politics. Dr. Munir Majid, an LSE IDEAS Visiting Senior Fellow, highlighted the Southeast and East Asian experience during the financial crises in 1998 and pointed out that the strong reliance on markets led to devastating results when the economic breakdown unfolded and most of the capital was withdrawn from the economies of the region. He also emphasised that the austerity measures and rules-based financial management that have caused strong controversies throughout Europe during the current crisis were enforced upon Southeast Asia. Professor Robert Wade from the LSE focused on the Cheng Mai Initiative that was founded in 2000 as a reaction to the East Asian crisis. One of the strongest motivating factors for the conclusion of this agreement between the ASEAN +3 countries, consisted in the member countries' bad experiences with the IMF during the crisis. However, he pointed out that the Chang Mai Initiative contained an 'IMF link' from the beginning, as countries in crisis could only borrow a small amount of the total it was permitted to borrow from the members of the Initiative, whereas the rest had to be allocated under an IMF standby agreement. The reason for this paradoxical provision, he noted, was to prevent countries from defecting by seeking bi-national loans in order to circumvent the Initiative's own conditionalities.

This conference was made possible with the kind support of Dr David Morgan and Hon Ros Kelly, the LSE Government Department and the LSE Annual Fund.

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